July 1, 2012 / 3:57 PM / 7 years ago

Political risks to watch in the Netherlands

AMSTERDAM (Reuters) - The Netherlands, one of the last triple-A rated euro zone countries, faces months of political and economic uncertainty after the government collapsed in April over budget cuts and elections were called for September 12.

Netherlands' Prime Minister Mark Rutte arrives on the second day of a European Union leaders summit in Brussels June 29, 2012. REUTERS/Eric Vidal

Once steady and predictable, Dutch politics have become more volatile, reflecting party differences on issues ranging from immigration and welfare to government finances and the cost of rescuing troubled euro zone economies.

Opinion polls show that, as has been common in the past, no single party would win a majority if an election was called now.

Given the fragmented political landscape, three or four parties would be needed to form a coalition, based around a centre-right bloc, a leftist bloc or a liberal-left pact.

Even then, most recent polls show the various combinations fall short of a parliamentary majority.

Prime Minister Mark Rutte’s minority Liberal (VVD)-Christian Democrat (CDA) government resigned on April 23 after its ally, Geert Wilders’ Freedom Party (PVV), refused to agree to 14 billion euros in budget cuts for 2013 needed to meet strict European Union limits on the budget deficit.

Within days, acting Finance Minister Jan Kees de Jager mustered support from three small opposition parties - Democrats 66, Christian Union, and GreenLeft - for the caretaker government’s revised budget package.

Those five parties currently command a majority in parliament and may be able to pass some of the cuts before elections on September 12 and the formation of a new government.

BUDGET CUTS

As a core euro zone member and one of the harshest critics of those European countries such as Greece and Portugal who failed to obey the rules, the Netherlands has been under intense pressure to get its own finances in order.

With the revised budget, the Netherlands has averted an immediate crisis and the finance minister has said it should be able to bring down its deficit, which was forecast to hit 4.6 percent of gross domestic output in 2013, to below the EU limit of 3 percent of economic output.

It is still unclear how many of the budget measures can be implemented before the election, or what will happen to the steps yet to be taken when a new cabinet takes office.

The revised package of budget cuts includes an increase in value added tax, extra taxes on fossil fuels, alcohol and tobacco, cuts in healthcare, a two-year pay freeze for civil servants, and a doubling of a tax on banks.

Unions and the biggest opposition parties have criticised the deal, saying it would harm growth, and warned it would be torn up after the election.

So if a left-leaning group such as the Socialist Party - which some recent opinion polls put ahead of the Liberals - or Labour were to form a new government, some of the 2013 budget measures could be scrapped, casting doubt on the country’s ability to meet the EU targets.

The Netherlands Bureau for Economic Policy Analysis (CPB) has warned the country faces soaring deficits after 2020 unless it makes broad structural reforms such as raising the pension age, making the labour market more flexible and cutting housing subsidies and tax breaks - some of which are unpopular with the main opposition parties.

The 2013 budget plan addresses some of those reforms, including limiting tax breaks for new homeowners, raising the retirement age gradually to 66 by 2019 and 67 by 2024, higher healthcare payments by consumers, and lower payouts for workers who are laid off.

What to watch:

- Implementation of budget cuts for 2013

- Strikes or protests over cutbacks

EURO ZONE

The Netherlands, like other euro zone countries, must approve the EU fiscal treaty which will enshrine balanced budget rules in national law. The Dutch parliament has been critical of euro zone bailouts, but has so far supported all such measures.

Although it is one of the most fiscally conservative members of the euro zone alongside Germany, the Netherlands has seen political and public support for costly bailouts fade.

In the past, the minority Liberal-Christian Democrat government had to rely on opposition parties, including Labour, to muster support for crucial euro zone votes, whether on the terms of a Greek bailout or proposals to provide extra money to the International Monetary Fund as part of a solution to the euro zone debt crisis.

Majority support is by no means certain for the fiscal treaty, particularly if the leftist parties form a new government, while Wilders has threatened to turn the elections into a referendum on Europe and the euro.

What to watch:

- Political and public support for euro zone bailouts

IMMIGRATION AND FOREIGN POLICY

The Dutch are deeply divided over immigration, Islam and the country’s international profile. Liberal immigration policies have been scaled back in recent years because of fears that immigrants, particularly Muslims, do not integrate easily into Dutch society and struggle to find jobs.

As the government’s main ally, Wilders was able to wield considerable influence in these areas: the government agreed to his demands for tougher immigration policies in return for his party’s support in parliament, and backed his demand for a ban on face-covering veils worn by some Muslim women, saying the veils flouted the Dutch way of life and culture.

But these policies could now fail to pass into law ahead of new elections if there is no longer majority support for them.

What to watch:

- Immigration issues, given concerns among Christian Democrat MPs about Freedom Party-brokered policies to reduce the influx of non-Western immigrants.

- Any unexpected points of contention. The government before the recent coalition fell because of Afghan troop deployments and the one before that over the asylum status of an anti-Islam MP, Ayaan Hirsi Ali.

Reporting by Sara Webb and Gilbert Kreijger; Editing by Pravin Char

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